Vascular Genetics Inc. and GenStar Therapeutics Corp. are merging to form Autus Genetics Corp., a company that will focus on the lead products of both of its parts. The merger was born out of a conversation between the two heads of the companies early this year.

"[GenStar CEO] Bob Sobol and I met in January and discussed some mutually beneficial activities that would help both companies," Richard Otto, CEO of VGI, told BioWorld Today, adding they soon had a second meeting. "We started thinking, What if we decided to get together?' Where we are today is based on those initial discussions."

The deal will be completed through a reverse merger of a wholly owned subsidiary of GenStar into VGI, having VGI survive as a wholly owned subsidiary of GenStar. GenStar then would become Autus through a name change. VGI shareholders would receive newly issued shares of San Diego-based GenStar common stock equal to the outstanding GenStar stock. The combined Autus would be expected to have about 38 million shares outstanding on a fully diluted basis.

"What we are going to do is merge the two and create Autus by changing the name," said Bob Atwood, chief financial officer at Atlanta-based VGI. "[We'll] file an S-4 and require a shareholder vote, but basically, we will put the two together."

When the dust settles, shareholders of privately held Vascular Genetics would hold 50 percent of Autus, as would shareholders of GenStar. The deal is expected to close in the fourth quarter, when shares of Autus would begin trading on the American Stock Exchange. GenStar shares will continue to trade on AMEX until the deal is final.

GenStar's stock (AMEX:GNT) rose 14 cents Friday, or 23.7 percent, to close at 73 cents. GenStar reported about 23.7 million shares outstanding as of June 30 and cash and equivalents of $10.4 million. Its net loss for the first half of the year was $5.6 million.

Although the deal requires a shareholder vote, the boards of both companies unanimously approved the merger, as have VGI's two largest shareholders, Human Genome Sciences Inc., of Rockville, Md., and Cato Holding Co., of Research Triangle Park. HGS would own 15 percent of Autus, as would Baxter International Inc., which has an equity stake in GenStar. VGI was formed in 1997 by HGS, Cato Holding and a hospital to develop a vascular disease gene therapy based on the vascular endothelial growth factor 2 angiogenesis gene (VEGF-2). (See BioWorld Today, Nov. 11, 1997.)

Otto and Atwood, who would become CEO and chief financial officer at San Diego-based Autus, respectively, are the only two employees of VGI.

They will gain the benefit of GenStar's 50 employees as Autus concentrates on the VEGF-2 product and GenStar's Factor VIII product for hemophilia.

"The focus will be on the development of two products," Otto said. "The later-stage VEGF-2 for cardiovascular disease - we will be entering Phase II level trials hopefully in Q1 for severe cardiovascular disease - and also continuing the development of the Factor VIII [product] in Phase I for hemophilia A."

VEGF-2 also might have potential in peripheral vascular disease, and Autus will have preclinical adenoviral programs, courtesy of GenStar, in cancer and a vaccine against HIV. Both preclinical programs are supported by the National Institutes of Health in Bethesda, Md.

Autus is the Latin word for "growth," a fitting name since the company's lead product is based on vascular endothelial growth factor, Sobol said. Sobol, who would become the president of Autus, also said it's an appropriate metaphor for growing the company itself.

Otto said the hope is that the 50 employees of GenStar remain in the merged company, although when change occurs, there is always a chance some might decide to work elsewhere. GenStar's Sobol put that thought to rest.

"This will be viewed enthusiastically by the GenStar staff," he said. "I think they will find this, as management does, an excellent opportunity to take the resources they have built and apply them to a later-stage opportunity."

There will be a need for funds at Autus, Atwood acknowledged. The vehicle for those funds is not yet known, but with the addition of a product further down the development trail and an expanded pipeline, Autus has something to say.

"It is obvious we'll need to raise funds, but it's early to say [how]," Atwood said. "We'll examine all options. We think it's a tremendous opportunity for investors. We have a good story."